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Experiencing M I S

Tenth Edition

Chapter 2

Organizational Strategy, Information Systems, and Competitive Advantage

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“We can’t be everything to everybody.”

Reputation as a company that is essentially a mobile, door-to-door eBay
Current focus on selling products
Jessica wants to focus on partnering with local companies to sell new products too
Could expand to become a “shipping” company
Could drastically change the supply chain

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Study Questions

2.1 How does organizational strategy determine information systems structure?

2.2 What five forces determine industry structure?

2.3 How does analysis of industry structure determine competitive strategy?

2.4 How does competitive strategy determine value chain structure?

2.5 How do business processes generate value?

2.6 How does competitive strategy determine business processes and the structure of information systems?

2.7 How do information systems provide competitive advantages?

2.8 What is the future of business processes and information systems?

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Strategy Determines Information Systems

2.1 How does organizational strategy determine information systems structure?

Figure 2.1 Organizational Strategy Determines Information Systems

This figure summarizes a planning process used by many organizations.
Start with Porter’s Five Forces to analyze industry structure.
Organizations examine the industry structure and determine a competitive strategy. That strategy determines value chains, which determine business processes. The structure of business processes determines the design of supporting information systems.

Long Description:

The diagram illustrates the organizational strategies involved in information systems as a continuum. The strategies are “Industry Structure,” “Competitive Strategy,” “Value Chains,” and “Business Processes.” The steps involved in each strategy are as follows:

(1) Industry Structure.

• Bargaining power of customers.

• Threat of substitutions.

• Bargaining power of suppliers.

• Threat of new entrants.

• Rivalry.

(2) Competitive Strategy.

• Better product and service across the industry.

• Lowest cost across the industry.

• Lowest cost within an industry segment.

• Better product and service within an industry segment.

(3) Value Chains.

• Line 1: Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost equals Total margin, primary activities.

• Line 2 (Primary activity): Acquire bicycle parts yields, produce bicycle yields, ship bicycle yields, market and sell bicycles yields, service customers.

• Line 3 (support activity): Manage supplier relationships (procurement); Investigate new designs (technology); Hire and support employees (human resources); Manage company resources (firm infrastructure).

• Line 4: Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost equals Total margin, support activities.

• The total margin of primary and support activities together gives the total margin.

(4) Business Processes.

Vendor.

• Product marketing materials (web site, et cetera) (product data to select vendor product).

• Sell products (negotiation with the buyer).

• Ship goods.

Buyer.

• Select vendor product (provide and receive vendor and product data to and from vendor order repository).

• Negotiate prices and maximum quantities.

Event sales.

• Setup and run auction (total items to purchase to order goods from vendor).

• Customer order repository (customer order to shipping orders to customers).

Operations

• Order goods from the vendor (vendor order to vendor order repository).

• Vendor order repository (exchange vendor order and revise vendor order while receiving goods).

• Receive goods.

• Ship orders to customers (provides customer support to receive ordered items).

Customer.

• Purchase auction items (purchases to set up and run an auction).

• Receive ordered items (customer shipment).

(5) Information systems.

A five-component framework that includes hardware, software, data, procedures, and people.

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Five Forces Determine Industry Structure (1 of 2)

2.2 What five forces determine industry structure?

Competitive Forces

Competition from vendors who manufacture substitutes.
Competition from new competitors.
Competition from existing rivals.

Bargaining Power Forces

Bargaining power of suppliers.
Bargaining power of customers.

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Five Forces Examples

2.2 What five forces determine industry structure?

Figure 2.3 Examples of Five Forces

Force	Example of Strong Force	Example of Weak Force
Bargaining power of customer	Toyota’s purchase of auto paint (because Toyota is a huge customer that will purchase paint in large volume)	Your power over the procedures and policies of your university
Threat of substitutions	Frequent traveler’s choice of auto rental	Patients using the only drug effective for their type of cancer
Bargaining power of suppliers	New car dealers (because they control what the “true price” of a vehicle is and the customer cannot reliably verify the accuracy of that price)	Grain farmers in a surplus year (an oversupply makes the product less valuable and less profitable)
Threat of new entrants	Corner latte stand (because it is an easy business to replicate)	Professional football team (because the number of teams is tightly controlled by the NFL)
Rivalry	Used car dealers (because there are many to choose from)	Google or Bing (expensive to develop and market a search engine)

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Five Forces Determine Industry Structure (2 of 2)

2.2 What five forces determine industry structure?

Figure 2.3 Examples of Five Forces

Force	eHermes Example	Force Strength	eHermes’ Response
Bargaining power of customers	A large account wants a greater share of profits	Strong	Lower prices or diversify into other markets
Threat of Substitutions	eBay offers local delivery service	Medium	Offer differentiating services, like shipping, transportation, or entertainment
Bargaining power of suppliers	We’re increasing the cost of the self-driving vehicle chassis	Weak	We’ll buy from a different manufacturer
Threat of new entrants	Uber starts offering mobile retail services	Medium	Offer differentiating services and enter other markets
Rivalry	Amazon offers drone delivery	Weak	Offer additional services or create additional corporate partnerships

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Industry Structure Analysis Determines Competitive Strategy

2.3 How does analysis of industry structure determine competitive strategy?

Figure 2.5 Porter’s Four Competitive Strategies

Source: Based on “How Competitive Forces Shape Strategy” by Michael Porter, Harvard Business Review, July–August 1997.

To be effective, organization goals, objectives, culture, and activities must be consistent with the organization’s strategy.
This means, all information systems in organization must facilitate the organization’s competitive strategy.
Each of the three competitive forces concerns the danger of customers taking their business elsewhere.
Have students examine table to see why eHermes is exploring possibility of offering shipping service.

Long Description:

The two-way table shows the vertical axis depicting “Industry-wide” and “Focus.” The horizontal axis depicts “Cost” and “Differentiation.” The information presented in the table appears as follows:

• Industry-wide and cost.

Lowest cost across the industry.

• Industry-wide and differentiation.

Better product or service across the industry.

• Focus and cost.

Lowest cost within an industry segment.

• Focus and differentiation.

Better product and service within an industry segment.

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Value Chain Concepts (1 of 3)

2.4 How does competitive strategy determine value chain structure?

Industry analysis leads to determining competitive strategy.
Business activities must align with the chosen strategy

Cost leader strategy requires activities performed at lowest possible cost
Differentiation strategy requires activities that support distinction

Value: amount customers will pay for resource, product, or service
Margin: value of activity – cost of the activity

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Value Chain Concepts (2 of 3)

2.4 How does competitive strategy determine value chain structure?

Value chain: network of value-creating activities.

Primary activities: business functions directly related to product or service production

Inbound Logistics
Operations/Manufacturing
Outbound Logistics
Sales and Marketing
Customer Service

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Value Chain Concepts (3 of 3)

2.4 How does competitive strategy determine value chain structure?

Support activities: business functions that assist the primary activities

Procurement
Technology
Human Resources
Firm Infrastructure

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Drone Manufacturer’s Value Chain

2.4 How does competitive strategy determine value chain structure?

Figure 2.6 Drone Manufacturer’s Value Chain

Medium-sized drone manufacturer’s value chain--network of value-creating activities

Difference between the value that an activity generates and its cost is called margin.
Linkages--interactions across value activities.

Long Description:

The details are as follows:

Line 1: Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost equals Total margin, primary activities.

Line 2 (Primary activity): Acquire drone parts, produce drone, ship drones, market and sell drones, and service customers.

Line 3 (Support activity): Manage supplier relationships (procurement); Investigate new designs (technology); Hire and support employees (human resources); Manage company resources (firm infrastructure).

Line 4: Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost plus Margin equals value minus cost equals Total margin, support activities.

The total margin of primary and support activities together gives the total margin.

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Value Chain Primary Activities

2.4 How does competitive strategy determine value chain structure?

Figure 2.7 Task Descriptions for Primary Activities of the Value Chain

Source: Based on Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (The Free Press, a Division of Simon & Schuster Adult Publishing Group). Copyright © 1985, 1998 by Michael E. Porter.

Primary Activity	Description
Inbound Logistics	Receiving, storing, and disseminating inputs to the product
Operations/Manufacturing	Transforming inputs into the final product
Outbound Logistics	Collecting, storing, and physically distributing the product to buyers
Sales and Marketing	Inducing buyers to purchase the product and providing a means for them to do so
Customer Service	Assisting customer’s use of the product and thus maintaining and enhancing the product’s value

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Business Process Concepts

2.5 How do business processes generate value?

Business process: a network of activities that generate value by transforming inputs into outputs
Business processes vary in terms of costs and effectiveness
Streamlining business processes is a key to competitive advantage

Add value
Reduce costs
Add value and reduce costs

How something is done (the business process) is just as important as what is done.

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Depicting and Improving Business Processes (1 of 2)

2.5 How do business processes generate value?

Figure 2.8 Existing Best Bikes Business Process Using B P M N

Best Bikes business process of selling products on its web site.

Long Description:

The details are as follows:

• Vendor.

Product marketing materials (web site, et cetera) (product data to select vendor product).

Sell products (negotiation with the buyer).

Ship goods.

• Buyer.

Select vendor product (provide and receive vendor and product data to and from vendor order repository).

Negotiate prices and terms (item descriptions, specifications, photos, and prices lead to set up product offerings on the website).

• Website sales.

Set Up Product Offering on Website (total items to purchase to order goods from vendor).

Customer order repository (customer order to shipping orders to customers).

• Operations.

Determine Order Quantity

Order goods from the vendor (vendor order to vendor order repository).

Vendor order repository (exchange vendor order and receive vendor order while receiving goods).

Receive Goods, Place in Inventory

Ship orders to customers (provides customer support to receive ordered items).

• Customer.

Purchase from the Website.

Receive ordered items (customer shipment).

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Depicting and Improving Business Processes (2 of 2)

2.5 How do business processes generate value?

Figure 2.10 Revised Best Bikes Business Process Using B P M N

Summary of primary activities of a generic value chain.

Long Description:

The diagram illustrates the stages involved in the business process of existing Best Bikes appears as follows:

Vendor

Product marketing materials (website, etcetera; rectangular tab). This point towards selecting vendor product (buyer) via product data.
Sell products (rectangular tab). This point toward negotiating prices and terms (buyer) via negotiation which point to selling products back via negotiation.
Ship goods (rectangular tab). This points toward receiving goods, placed in inventory (operations) via vendor shipment.

Buyer.

The start point points towards Select vendor product (rectangular tab). This points toward the negotiated prices and terms and Vendor data repository (rhombus-shaped tab) via vendor and product data.
Vendor data repository points back toward selecting vendor products via vendor and product data.
Negotiate prices and terms (rectangular tab) point toward vendor data repository and towards setting up product offerings on the website (website sales, rectangular tab) via item descriptions, specifications, photos, and prices.
Negotiate prices and terms labeled as how do we negotiate with ourselves?

Website sales.

Setup product offerings on the website point toward the Customer order repository (rhombus tab) via customer order and towards determining order quality (rectangular tab) via item ready to sell.
Setup product offerings on the website labeled as any changes needed here for 3D printed products?

Operations.

Determine order quantity point toward 3D print ourselves? Yes, point towards making the product (3 D printing) and No towards ordering goods from the vendor (rectangular tab).
Order goods from the vendor point toward vendor order repository (rhombus tab) via vendor order and toward ship goods (vendor).
The vendor order repository points towards receiving goods, place in inventory (rectangular tab) via vendor order which in turn point back to the repository via revised vendor order.
Ship orders to customer (rectangular tab) followed by the endpoint. The customer order repository (website sales) point toward shipping order to customers via custom order.

3-D printing.

Make the product point towards check product quality via manufactured product followed by reject (rhombus tab). If yes then point back to making the product if no then point towards shipping orders to customers.

Customer.

Purchase from WebSite (rectangular tab) points towards setting up product offerings on the website (website sales) via purchase.
Receive ordered items pointed by ship order to the customer via customer shipment.

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Operations Value Chain Options: Low-Cost versus High-Service

2.6 How does competitive strategy determine business processes and the structure of information systems?

Figure 2.11 Operations Value Chains for Bicycle Rental Companies

Operations Value Chains for Bicycle Rental Companies

Long Description:

The details are as follows:

For Low-Cost Rental to Students:

• Value Chain Activity - Message that implements competitive strategy.

• Greet Customer - “You wanna bike?”

• Determine Needs - “Bikes are over there. Help yourself.”

• Rent Bike - “Fill out this form, and bring it to me over here when you’re done.”

• Return Bike & Pay - “Show me the bike.” “OK, you owe 23.50 dollars. Pay up.”

• Value Chain Activity - Supporting business process.

• Greet Customer - None.

• Determine Needs - Physical controls and procedures to prevent bike theft.

• Rent Bike - Printed forms and a shoebox to store them in.

• Return Bike & Pay - Shoebox with rental form. Minimal credit card and cash receipt system.

High-Service Rental to Business Executives at Conference Resort:

• Value Chain Activity - Message that implements competitive strategy.

• Greet Customer - “Hello, Ms. Henry. Wonderful to see you again. Would you like to rent the WonderBike 4.5 that you rented last time?”

• Determine Needs - “You know, I think the WonderBike Supreme would be a better choice for you. It has dot dot dot.”

• Rent Bike - “Let me just scan the bike’s number into our system, and then I’ll adjust the seat for you.”

• Return Bike & Pay - “How was your ride?” “Here, let me help you. I’ll just scan the bike’s tag again and have your paperwork in just a second.” “Would you like a beverage?” “Would you like me to put this on your hotel bill, or would you prefer to pay now?”

• Value Chain Activity - Supporting business process.

• Greet Customer - Customer tracking and past sales activity system.

• Determine Needs - Employee training and information system to match customer and bike, biased to “up-sell” customer.

• Rent Bike - Automated inventory system to check the bike out of inventory.

• Return Bike & Pay - Automated inventory system to place bike back in inventory. Prepare payment documents. Integrate with the resort’s billing system.

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High-Service Rental Value Chain

2.7 How do information systems provide competitive advantages?

Figure 2.12 Business Process and Information Systems for High-Service Bike Rental

Operationalized personalize customer service along with use of automation.

Long Description:

The details are as follows:

• “Customer database” to “Query for customer data” to “Greet customer” to “Customer Data” to “Determine needs” to “Selected bike data” to “Rent a bike” to “Update bike checkout” to “bike inventory database.”

• “Bike inventory database” to “Query for available up-sell bike” to “Determine needs”.

• “Rent bike” to “Update customer data” to “Customer database”.

• “Return bike and pay” to “Update bike return” to “Bike inventory database”.

• “Return bike and pay” to “Dirty Bike” to “Bicycle inventory” to “Clean bike” to “Rent bike”.

• “Return bike and pay” to “Hotel charge data” to “Hotel billing system”.

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Principles of Competitive Advantage

2.7 How do information systems provide competitive advantages?

Product Implementations

Create a new product of service
Enhance products or services
Differentiate products or services

Process Implementations

Lock in customers and buyers
Lock in suppliers
Raise barriers to market entry
Establish alliances
Reduce costs

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Competitive Advantages Via Products and Processes

2.7 How do information systems provide competitive advantages?

Figure 2.13 Principles of Competitive Advantage

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Competitive Advantages Via Products (1 of 2)

2.7 How do information systems provide competitive advantages?

Figure 2.14 Two Roles for Information Systems Regarding Products

a. Information System as Part of a Car Rental Product

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Competitive Advantages Via Products (2 of 2)

2.7 How do information systems provide competitive advantages?

Figure 2.14 Two Roles for Information Systems Regarding Products

b. Information System That Supports a Car Rental Product

Operationalized personalize customer service along with use of automation.

Long Description:

The details are as follows:

Daily Service Schedule – November 17, 2024.

• StationID – 22

StationName – Lubrication.

ServiceDate: 06/15/2024; ServiceTime: 12:00 AM; VehicleID Make: 155890 Ford; Model: Explorer; Mileage: 2244; ServiceDescription: Std. Lube.

ServiceDate: 06/15/2024; ServiceTime: 11:00 AM; VehicleID Make: 12448 Toyota; Model: Tacoma; Mileage: 7558; ServiceDescription: Std. Lube.

• StationID – 26

StationName – Alignment.

ServiceDate: 06/15/2024; ServiceTime: 9:00 AM; VehicleID Make: 12448 Toyota; Model: Tacoma; Mileage: 7558; ServiceDescription: Front end alignment inspect.

• StationID – 28

StationName – Transmission

ServiceDate: 06/15/2024; ServiceTime: 11:00 AM; VehicleID Make: 155890 Ford; Model: Explorer; Mileage: 2244. ServiceDescription: Transmission oil change.

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Using I S to Create Competitive Advantages

2.7 How do information systems provide competitive advantages?

A B C Shipping Company Example:

Enhances existing service
Differentiates services
Offers new service
Locks in customers
Raises barriers to market entry
Increases profit margins by decreasing costs and decreasing errors

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Technology Changes Business Processes

2.8 What Is the Future of Business Processes and Information Systems?

Startups: companies in early stage of development, aiming to use technology to create new products/services
Unicorn: a tech company that reaches a $1 billion in a short period of time
Technology can be used to change business processes:

Adopting low-code systems
Adopting robotic process automation (R P A)
Augmenting R P A with A I: intelligent automation

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How Does the Knowledge in This Chapter Help You?

Identify key points eHermes must address in deciding whether to diversify the types of services the company provides.
Develop guidance for yourself about relationship between competitive strategy and information systems requirements
Summarize what you have learned from this example in a statement that you could make in a job interview

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Amazon Everywhere

So What?

Amazon purchased the grocery retailer Whole Foods for more than $13 billion in 2017.
Amazon Go is Amazon’s “Just Walk Out” small format retail store, featuring no staffed checkouts or self-checkout kiosks.
Self-driving cars are disrupting the automotive industry.
New technological advances will disrupt many industries in the future

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Critical Ransom

Security Guide

Ransomware attacks on computer systems and critical infrastructure are becoming increasingly common
Human error often opens the door to a successful ransomware attack
Will attackers decrypt data once the ransom is paid?
Preparation for likely attacks is necessary. Know how to quickly and intelligently respond before an attack happens

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Managing Director

Career Guide

Andrew Yenchik, Managing Director, Charles Schwab

Q. What attracted you to this field?

A. “I wanted to find a field that mixed business and technical skills and that requires a problem-solving mindset. I didn’t want to only have technical abilities and not understand the whys and hows of business functions.”

Q. What advice would you give to someone who is considering working in your field?

A. “Stretch yourself to gain a broad range of skills and experiences while in school and in the early years of your career…If you’re not growing or stretching yourself and even failing, you’re hanging out in the wrong neighborhood.”

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The Robot Will Hire You Now

Ethics Guide

The problem: A fully automated system for screening job applicants is available.
Is such a system advantageous to an organization? How?
What are the issues/concerns associated with such a system?
Do you agree that the system developers could introduce unintentional bias into the system?
Discuss how to apply the utilitarian approach to assessing ethical conduct in this scenario

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Active Review

2.1 How does organizational strategy determine information systems structure?

2.2 What five forces determine industry structure?

2.3 How does analysis of industry structure determine competitive strategy?

2.4 How does competitive strategy determine value chain structure?

2.5 How do business processes generate value?

2.6 How does competitive strategy determine business processes and the structure of information systems?

2.7 How do information systems provide competitive advantages?

2.8 What is the future of business processes and information systems?

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The Amazon of Innovation (1 of 2)

Case Study 2

Figure 2.15 Innovation at Amazon

Source: Data from

Amazon.com

: press.aboutamazon.com/press-releases accessed May 2021.

Figure shows list of business innovations created by Amazon for online retailing. Began as an online bookstore in 1994 and added new product categories. In 2016, Amazon sold goods in dozens of product categories.

Long Description:

The details are as follows:

• 1994

o First online bookseller

• 1996

o Launch of Amazon

o Associates Program, sellers earn revenue by featuring Amazon products on their Web sites

• 1997

o 1-Click (Trademark) Shopping

• 1998

o Amazon Advantage

o Program – self-service consignment sales for media

• 1999

o Amazon auctions – competitor to eBay that failed

• 2000

o Launches Marketplace – sellers can sell goods on the Amazon Web site and Amazon can fulfill the orders

• 2001

o Borders Group Alliance and Target Stores Alliance

• 2002

o Amazon Web Services (A W S), leasing of computer infrastructure

• 2003

o Search Inside the Book (Trademark)

• 2004

o Amazon Associates Web Services, gives developers access to Amazon product data

• 2005

o Amazon Prime

• 2006

o Alexa Web Information Service

• 2007

o Kindle

• 2008

o Amazon Web Services enhancements and upgrades

• 2009

o Kindle 2 and Kindle DX

o Kindle applications for iPhone and iPod Touch

• 2010

o Kindle for Mac, iPad, Android, and Web

• 2011

o Amazon Instant Video

• 2012

o Kindle Paperwhite

o Kindle Fire H D

• 2013

o Amazon Coins

• 2014

o Fire T V

o Prime Now

• 2015

o WorkMail

o Amazon Home Services

o Amazon Destinations

o Amazon Echo (Alexa)

o Amazon Dash

o Amazon Books

o Semiconductors (Annapurna Labs)

• 2016

o Kindle Oasis

o Payments Partner Program

o Amazon Echo Dot

o Amazon Tap

o Handmade By Amazon

o Amazon A I Services

• 2017

o Amazon Chime

o Whole Foods

o Amazon Prime Wardrobe

• 2018

o Amazon Go

o Amazon 4-Star

o Merch by Amazon

• 2019

o Amazon Scout

o Echo devices

o Amazon Braket

o AWS IQ

• 2020

o Amazon Luna

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The Amazon of Innovation (2 of 2)

Case Study 2

Amazon’s business lines three categories:
Online retailing

Own inventory
Associates program
Consignment

Order fulfillment
Cloud services

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Fulfillment Fees for Standard-Sized Products (as of May 2021)

Case Study 2

Standard Size	F B A Costs
Small (10 o z or less)	$2.50
Small (10+ to 16 o z)	$2.63
Large (10 o z or less)	$3.31
Large (10+ to 16 o z)	$3.48
Large (1 to 2 l b)	$4.90
Large (2 to 3 l b)	$5.42
Large (over 3 l b)	$5.42 + $0.38/lb above first 3 lb
Storage (cubic foot per month)	$0.75

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Impact of F B A

Case Study 2

Amazon provides customer service for order processing (handling returns, fixing erroneously packed orders, answering customer order queries, etc.).
Using Web-standard technology, F B A customers’ order and payment data directly linked to Amazon’s information systems.
Enables companies to outsource order fulfillment to Amazon, thus avoiding the cost of developing their own processes, facilities, and information systems for this purpose.

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Copyright

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